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  A Short History of Freeport LNG
 
January 2005: April 2008:
 

The Early Years

 

The idea of the Freeport LNG terminal project was born in late 2000 when a small exploration and production company, Cheniere Energy, observed that the cost to find and develop oil and gas reserves in the United States was becoming sufficiently high to make LNG competitive. In late 2000 and early 2001, Cheniere formed a team to look at the business opportunities for an LNG receiving terminal in Texas. The initial development team consisted entirely of Charles Reimer (Freeport LNG’s President), Volker Eyermann (Freeport LNG’s VP Engineering, who died in the spring of 2005), Hugh Urbantke (Freeport LNG’s CFO) and later Bill Henry (Freeport LNG’s VP Regulatory). Altogether, the team had over 50 years of LNG experience and over 100 years of experience in the energy business in general.

With this small team, and even a smaller budget, every port in Texas was scrutinized and assessed for suitability to host an LNG terminal. Four ports, Freeport, Corpus Christi, Port Arthur, and Brownsville were deemed suitable. Of these locations, Freeport was determined to offer the most attractive opportunity. According to Charles Reimer, “The outstanding marine conditions are the first thing that you notice in Freeport. Other LNG terminals have up to a 50-mile long channel. Freeport LNG’s is a fraction of that. Good marine conditions are so important to the smooth operations of an LNG terminal. Plus, Freeport is close to two of the largest gas hubs in the world, Katy and the Houston Ship Channel. But honestly, one of the things we liked most about Freeport was the fact there was only one place in the port you could put an LNG terminal. When you are a developer with a market cap of less than $10 million, it is nice to know you won’t have to compete with a major energy player building a terminal next door.”

In 2001 and early 2002, Cheniere was working very hard to develop the LNG terminal idea, find investors and land terminal customers. “We were working on a shoestring. Everyone we pitched the project to would tell us how the idea made sense, but nobody would invest or sign up as a customer. And we talked to everyone. If you could spell L-N-G, we’d pitch the project to you. It was discouraging,” remembers Hugh Urbantke.

 

 

 

The Birth of Freeport LNG

 

About the same time that Cheniere was determining that the cost to find and develop gas in the U.S. made LNG attractive, Michael Smith, founder, Chairman and CEO of Basin Exploration Company, as well as its largest shareholder, was closing the sale of Basin to Stone Energy. “As it was becoming significantly more difficult to replace reserves in the Gulf Coast, I decided it was the best time for my shareholders to sell,” said Michael Smith.

After only a few months in retirement, Michael started to look for another business opportunity and was presented with the Freeport terminal idea. “I was intrigued. I didn’t know anything about LNG but I knew how difficult and expensive domestic gas development had become—and LNG made sense.” Cheniere was trying to find investors to pursue two or three LNG terminals. While Michael was not convinced that he should invest in Cheniere, he was convinced he should buy the Freeport terminal project. “I was making a commitment of between $10 and $15 million for one terminal. I was convinced of the advantages of Freeport but one project was enough for me at the time,” commented Michael.

 

 

 

Gaining Traction

 

In early 2003, Freeport LNG submitted its application to build the LNG terminal to the Federal Energy Regulatory Commission. “The application was 13 volumes and hundreds of pages long. Detailed engineering, safety studies, environmental studies, etc. were necessary. It cost millions of dollars to make an application and even more to get it through the approval process,” said Bill Henry.

After that point, things started to move at a fast pace. In June 2003, a Heads of Agreement was closed with The Dow Chemical Company to become Freeport LNG’s first customer. “We always knew Dow would be critical to the success of the project,” said Hugh Urbantke. “The team had extensive discussion with Dow the whole time Cheniere was developing the project in Freeport but we couldn’t ever close a deal. Dow could never get comfortable enough to make such a large commitment. It didn’t take Michael long to overcome that obstacle. Almost overnight, Michael developed the level of trust with Dow management that brought them into the project as a customer.” Shortly thereafter, Dow purchased a 15% equity stake in Freeport LNG.

In December of 2003, ConocoPhillips became Freeport LNG’s second customer, its lender and co-manager of the project with Michael Smith. “All at once, we were sold out and fully financed. It was a green light for construction; once we got final approval from the FERC, we could start building,” said Charles Reimer. But FERC approval would be slow in coming. Finally, in January 2005, almost two years after the application was filed and a year after the terminal capacity was sold out and financed, Freeport LNG was awarded the permit to construct. Construction started in January 2005, and three years later, in June 2008, the terminal was ready for commercial operations.